Authors: MLT Aikins ESG practice group
It has been almost one year since we published our “Worried About Mandatory Reporting? Read This” article in response to clients’ concerns around pending mandatory ESG disclosure requirements in Canada. Since then, there have been a number of significant updates on that front, including formal disclosure rules for federally regulated financial institutions and increased supply chain due diligence and reporting requirements around modern slavery.
Most recently, after 18 months of extensive development work and public consultation, the International Sustainability Standards Board (ISSB) has released its first two inaugural standards – IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. ISSB Chair Emmanuel Faber noted that the standards leverage the prior work of the International Accounting Standards Board in translating sustainability into accounting language. He also highlighted that the standards intentionally broaden the scope of sustainability reporting across the entire corporate value chain as well as across short, medium and long corporate time horizons.
Alignment with TCFD
The ISSB standards fully incorporate the recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD). Both IFRS S1 and S2 follow the same structure as TCFD, requiring corporate disclosures under the categories of Governance, Strategy, Risk Management and Metrics & Targets. Alignment with the TCFD recommendations continues to be observed across many proposed ESG reporting standards, including the Canadian Securities Administrators’ (CSA) Proposed National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107) and the U.S. Securities and Exchange Commission’s proposed rule on climate-related disclosures.
Consideration of feedback
During the consultation period for feedback on the exposure drafts of IFRS S1 and S2 and subsequent re-deliberations, the ISSB received almost 735 and 700 comment letters, respectively. The resulting standards attempt to address feedback by providing transition relief on key items, application guidance and clearly documented “basis for conclusions” information that articulates the rationale and background for each requirement.
Transition relief
For IFRS S1, transition relief focuses on the need to align with financial reporting time periods as well as the included sustainability-related topics and comparative information. In their first annual report, companies are permitted to focus only on climate-related risks and opportunities without comparative information, although they must disclose the fact that they are taking the permitted transition relief.
During the consultation period for IFRS S2, one item that received the most pushback from stakeholders due to data availability and quality challenges was Scope 3 greenhouse gas emissions (GHGs) reporting. Consistent with its announcement in December 2022, the ISSB has required disclosure of Scope 3 GHGs as described in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011); however, the ISSB has provided transition relief allowing companies to submit their first annual reporting period without disclosing their Scope 3 GHGs. In an attempt to facilitate future reporting quality, the ISSB has provided detailed guidance in S2, Appendix B around GHG measurement, aggregation and analysis with a significant focus on Scope 3 emissions.
Intended audience
In both the standards and accompanying communications, the ISSB has clearly articulated its intention to “improve trust and confidence in company disclosures about sustainability to inform investment decisions.” The standards focus on disclosure of information “useful to primary users of general purpose financial reports” that “could reasonably be expected to affect the entity’s prospects.” Publicly traded companies are expected to be most impacted by the ISSB requirements through regulatory bodies such as the CSA, although private companies will also feel the impact of increased demands for information and data (especially climate-related data) from their publicly traded customers and suppliers.
Canadian adoption of ISSB standards
The Canadian Sustainability Standards Board (CSSB) issued a media release confirming that it will be “supporting the uptake of ISSB standards in Canada, highlighting key issues for the Canadian context, and facilitating interoperability between ISSB standards and any forthcoming CSSB standards.” The CSSB also indicated that it would be collaborating with Canada’s regulatory bodies around “mandatory application rules of standards for Canada’s publicly accountable enterprises.” The CSA and the Office of the Superintendent of Financial Institutions have previously indicated their support for the ISSB and their intent to adopt ISSB requirements, either in whole or in part, in the future. For companies adopting the standards, IFRS S1 and S2 are effective for annual reporting periods beginning on or after January 1, 2024, although earlier application is permitted.
Due diligence for disclosures
During this transitional period between voluntary and mandatory ESG reporting requirements, many companies are taking a more diligent and rigorous approach to review their public disclosures in light of the legal risks associated with potential litigation from corporate stakeholders such as investors or activist groups. The number of companies seeking third-party assurance and legal risk assessments on their ESG data and reports has increased significantly as highlighted in a recent Workiva report of 300 executives at public companies. Seventy percent of executives reported their company “already uses independent assurance and would continue,” while almost all others (27%) report their company “will likely seek assurance even if it’s not required.”
The MLT Aikins ESG practice group has wide-ranging and multi-disciplinary experience advising clients in all industries on their ESG strategies. Even if your company has substantial experience in public disclosure of ESG and climate-related information, it is worth taking a fresh look at the legal risks around your disclosures in light of upcoming mandatory reporting requirements. Contact us to learn how we can help.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.